Yoshida in China: NXP deals with 'freeze mode’

China's manufacturing index rose in October, hinting that a manufacturing downturn has bottomed out. Still, companies like NXP are still looking for signs of a rebound.

NEW YORK -- In search of economic reality, we pay attention to things like the China's manufacturing Purchasing Managers’ Index (PMI). The latest figures show an uptick to 49.1 in October from 47.9 in September. This flash index is supposedly the earliest indicator of the state of factory orders in China.

A figure below 50 indicates that the Chinese industrial sector is still contracting, but the current figure indicates that Chinese manufacturing may have started to rebound.

Has it?

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When I sat down last week with NXP Semiconductors CEO Rick Clemmer, I asked him how China’s economic slowdown is affecting the chip maker. Clemmer's view on this is important because, as he says, “NXP is practically a Chinese company,” employing 8,000 workers there with “close to 50 percent of [its] revenue is coming from Greater China."

Early in August, I reported here that China’s factory PMI had fallen to an eight-month low, indicating a slow start for China’s factories in the second half of this year. Growth has now stagnated for almost a year.

Now it appears China’s economic slowdown may have hit bottom, with a rebound underway. Still, it will take at least a quarter or two for the positive effects to show up.

Clemmer acknowledged during our interview that China has been in “a freeze mode” for the past couple of quarters. Two reasons for the chill are the slowdown on the Chinese economy and uncertainty surrounding the transition to new political leadership.

Citing NXP’s distribution partners, Clemmer said, “I am hearing that these distributors are seeing a 5 to 10 percent sequential drop” in market demand during the current quarter.

This outlook bodes ill for NXP, which generates close to half of its revenue in China. Will business conditions improve after China’s new political leaders take charge? Clemmer said, “I’ve been told so," acknowledging, “Nobody knows what’s going to happen.”

China's current five-year plan includes policies like energy savings, which Beijing is pushing hard. In order to meet the energy reduction goals, solid-state smart lighting is critical. So is a smart grid. “For every smart grid, you do need the best security because you don’t want anyone to [be] remotely manipulating the grid,” said Clemmer, implying a huge opportunity for NXP in security applications.

“There have been a lot of discussions and some design wins in China," Clemmer said. "But we haven’t seen much movement in product shipment.”

For now, NXP is forecasting 3 to 9 percent drop in the product revenue during the fourth quarter. Beyond that, who knows?